Focus On RBI CREDIT POLICY

Reserve Bank Of India Credit Policy

1.CRR, Repo and Reverse Repo rates have been kept unchanged. It has upped inflation target from 4% to 5%. It has kept the GDP target at the same levels of 6% with an upward bias. M3 supply target has been increased from 17% to 18%.

2.The various stimulus packages are now doing their jobs, the first quarter results have been good, hence it made no sense to right now tinker with any rates.

3.Growth has been taken care of by the Govt but as expected, RBI is concerned about inflation which is why we saw the target upped.

4.RBI has stated that there were indications of inflation firming up by the end of the year due to increases in commodity prices, easy monetary policy and expansionary fiscal policy.

5.has reiterated that it will maintain an accommodative monetary stance until there are definite and robust signs of recovery,

6.RBI has said that banks have cut rates but need to do more. The message which RBI has thus sent across is that it has done its job well and the ball now lies in the court of the banks. They need to lend but not mindless lending. But once banks loosen their purse strings, demand would pick up and this as per RBI, is where the trick now lies.

Reaction Of Indian Stock Market.

The market opened lackluster and remained low but it had already discounted the credit policy and it was absolutely no surprise to anyone on the street. RBI has sent a message across that it has adopted a neutral stance and is now allowing the market forces to play.

IT COMPANIES ARE RECOVERING VERY SHARPLY

Most of the bigwig IT companies have declared their performance for Q1FY10 and call it muted analysts expectations or improved performance, most of the bigwigs have done well despite the trying circumstances.

It started with Infosys which for first quarter of current fiscal posted a 17.2% YoY rise in net profit at Rs.1,527 crore but QoQ, it was down 5.3%. But what really worried the marketmen was its guidance for FY10, where it has forecast consolidated revenue to fall 3.1-4.6% to $4.45-$4.52 billion and expects earnings to decline 11.1-12.3% in dollar terms. For Q2FY10, its guidance states that it expects revenues to decline by 1.9% to 0.1%.

TCS showed a YoY 23% and QoQ 15% growth in net profit at Rs.1520 crore. TCS does not give guidance. But the news on the street is that the company is expected to show a higher forex loss of around Rs.90 crore in Q2FY10, up from Rs.84 crore in Q1FY10. This is because the company expects over $112 million of its forex hedges expected to mature during the period.

Wipro showed a 5% (YoY) rise in revenues during the first quarter at Rs.6,274 crore but QoQ it fell marginally by 3%. Net profit was up 11.78% (YoY) at Rs 1015.5 crore and almost flat when compared on a QoQ. The company however provided a cautious and flat forecast for the quarter ending September reflecting lower demand for India’s $40-billion software export industry.

The common thread running between all three bigwigs is that their Q1FY10 numbers beat expectations – both of the market as well of analysts, who had expected a much dismal performance. Another commonality is that they all have given a much subdued guidance for Q2FY10 and for FY10.

There is no doubt that the Indian IT companies have managed to keep their heads up even in these turbulent times. Despite having a wide exposure to America, Europe and also the BFSI sector, which witnessed the big bash-up, these companies have managed to walk tall. Yes, their businesses to these developed countries have come down marginally. But what it has also done is open up new opportunities which would have remained unexplored but for this recession. So these bigwigs are now looking at new markets like Latin America, South East Asia.

Things have also started stabilizing in the developed countries as volume shrinkages have stopped and business ramp downs have also tapered off. Hence in that context, we can say that the worst does seem to be over. And the companies have given a lower guidance to be more on the safer side. As per a survey conducted by Bloomberg of economists, the consensus is that the U.S. economy will expand faster than previously forecast in the second half of this year and in 2010 as a revival in consumer spending signals an end to the recession. This optimism could have also stemmed from the fact that IBM the world’s biggest computer-services provider, on July 16 reported second-quarter earnings that topped analysts’ estimates and raised its full- year forecast.

Also most of these companies have re-negotiated prices at lower rates for the current year and they do not expect the prices to go up any time soon though at the same time, they do not expect the prices to fall also. It is a happy situation for them even if prices are maintained at current levels.

Another positive for the Indian frontline IT companies is that they have also started looking at home itself for big time business. Wipro and TCS have always had a presence in the domestic market, especially when it came to execution of Govt projects. But Infosys is looking anew at the Indian shores and the business potential it sees is immense. Infosys is looking at a business worth $2 billion in India itself to keep the slump at bay.

Apart from the Unique Identity Card project, there is the $2 billion e-biz program initiated under the National e-governance Plan which has 27 mission mode projects. Government organisations such as India Post, Indian Railways are also earmarked for major computerization exercise. There are also smaller outsourcing contracts from ONGC, LIC and the State Bank of India. Based on their track record and reputation, these bigwigs are sure to get massive orders from the Indian Govt in the coming months and this will more than makeup for the loss of business in

developed countries.

POWER GENERATION PROGRAMME OF INDIA

The Power Minister said that India would add 100,000 MW capacities during the 12th Plan period and the target for 11th Plan (ends in 2012) is 60,000MW. This has actually been scaled down from earlier announced 78,000MW for the 11th Plan. This scale down was blamed on the shortage of power supply equipments from BHEL and L&T. Till April 2008, we had achieved just about one percent of the earlier set target which is probably the main reason why the target has been scaled down considerably. Yet even this scaled down target seems difficult.

Of the target of 60,000MW, till date only 21% has been completed, meaning only 12,500MW has been added. So over the next three years, we are looking at a capacity addition of 47,500MW. This means, on an average, we have to add on 15,800MW every year till 2012. Well, 12,500MW took two years, can we have 15,800MW each year? When broken down as simply as this, clearly, it seems like a pipe dream. The Govt is banking on the private sector to deliver around 30% of the target before the end of the 11th Plan. It expects parts of the UMPPs to start adding on – 600MW from Reliance Power’s Rosa unit (end of 2009), 1320 MW from Reliance Power’s Sasan (by 2012) and Butiburi power unit to contribute 300MW by 2011. Tata Power has set itself a target of 5800MW by 2012 which includes parts of the Mundra UMPP going on stream and it expects 4000MW JV project with Damodar Valley to also be commissioned before end of 2012. So, putting together Reliance Power and Tata Power, we are looking at the best case scenario of 8000MW coming up by 2012.

JSW Energy is setting up a 3200MW power project and by March 2010, it expects 1200MW to go stream. Lanco Infratech also hopes to get 1000MW on stream by end of the current fiscal. GVK Power is also hoping to add another 1200MW before 2012. The biggest contributor would probably be Adani Power which is looking at delivering 6600MW by 2012. Indiabulls Power is also planning on huge power units but no major capacities are expected to go on stream before 2012. So when we total up all this, we are looking at another 10,000MW by 2012. And if we take into account Tata Power and Reliance Power, we are looking at the private sector contributing around 18,000MW of power by 2012. This is way above the 30% target given by the Govt but then we are assuming that there would be no slippages and the biggest contributor – Adani Power will keep up to its schedule.

The rest is to come from NTPC, which seems to be talking in the wind when it says that it is looking at setting up 30,000MW by 2012. Infact the private sector might deliver but NTPC will fall way short of the target and that could jeopardize the entire 11th Plan target.

To conclude, we will continue to have power shortages – both, in terms of actual supply of power and also in terms of generation but the private sector might just be able to keep the shortage at a lesser level if it does manage to keep to its schedules.

IPO's are back !!!!!!!!!!!!!!!!!!

The near comatose IPO market is surely showing of life and that too good life. All of a sudden, there seems to be a bevy of activity around the IPO markets and investors are reminded that apart from the secondary market, there is also the option of primary market coming forth soon.

The issue of Mahindra Holiday, despite being expensive managed to do well and the fact that it listed well above the IPO price, 5% premium over the issue price, has managed to buoy the moods – not just of the investors but of the companies too. The success of Mahindra IPO sent out a strong message – there is an appetite for IPOs but investors clearly are now careful about where they are investing. Known and reputed companies are what will see a good response.

The first such big issue is from Adani Power. This issue is opening on the 28th of July and closing on 31st July. This is the biggest power IPO to come to the market in a long while. The news on the street is that in all probability the IPO would be priced at around Rs.100-110 and aims to raise over Rs.3000 crore. Adani Enterprise, the listed group company, has been up since this news was announced as it holds a substantial stake in the company.

Then on 7thAugust, there is the IPO of PSU National Hydroelectric Power Co. (NHPC). The issue closes on August 12 and aims to raise over Rs 2,500 crore. As per the DRHP, the company is coming out with a public issue of 167,73,74,015 shares of Rs 10 each, which comprises a fresh issue of 1,11,82,49,343 equity shares by NHPC and an offer for sale of 55,91,24,672 equity shares by the president of India acting through the ministry of power, government of India. The issue shall constitute 13.64% of the post-issue capital of NHPC.

A month later, on 7th September, we have the IPO of Oil India Ltd (OIL), which aims to raise around Rs.2000 crore. The DRHP states that the issue is up to 26,449,982 equity shares of Rs 10 each and will be 11% of the fully diluted post-issue capital of the company.

So by September the IPO market aims to have raised Rs.6000 – Rs.7000 crore and surely, once this gate of raising money opens up, we will soon a flurry of activity. Infact Indiabulls Power has filed its DRHP with SEBI and it expects to raise around Rs.1500 crore.

As per Prime Database, 16 more companies have regulatory approvals and are finalizing plans to raise over Rs.5,700 crore from the IPO markets in this year. So what we are saying here is that 2009 would probably see around Rs.8000-Rs.10,000 crore being raised from the IPO markets. And those who have seen the IPO of Reliance Power, cannot help but ask, “will the market be able to absorb so much?”

The fact that over Rs.12,000 crore was raised via QIPs and there are more in the pipeline means that even the FIIs are waiting in the sidelines. Another point in favour of the primary markets this time around is that we are not in the stratosphere, with a zooming index. The Sensex is more subdued right now and this makes the pricing more attractive.

COMMODITIES TO BE BULLISH AHEAD

Rains are lashing Mumbai city and the commercial capital of India, is facing flooding in many areas and public transportation system is grappling to keep going despite the rains. Though this does not talk too highly about the infrastructure development of the city, it certainly is good news if the lakes manage to get sufficient water to quench the thirst of the city.

Though Mumbai is having a good rainfall today, the other states in India, especially Northern India is facing a tough time. Jharkhand today declared four of its districts as drought hit. The Met department is worried but not yet panicking. Revival of monsoon since July 8th has managed to reduce the deficiency from 46% to 33%. The Met Dept today stated that states of Madhya Pradesh and Maharashtra and Gujarat would get good rainfall over the next two days.

And in the midst of all these clouds, one thing shining brightly is the emerging truth that commodities might well turn out to be the 'next big thing'.

A deficient rain would mean lower agricultural production, meaning pressure on foodgrains and crops, which in turn means that prices would go up further. Unlike the stock market, where there are more downs than ups, the outlook is extremely bullish on commodities. If there is a drought, the prices will go up and if the rainfall in sufficient, production would be higher and that signals a positive for the commodities. We all need food, irrespective of a bull or a bear run. If there is a drought, imports will have to come in to feed us all. And once there is a bounce back in the economy, it is commodities which will be the first to see a jump. What happens if the downturn continues? People will still back commodities as the faith in currencies is slowly getting lost.

Take a look at the trend in China. In a bid to steer away from US dollars and stop putting all its reserves in the US dollars, China has been secretly stocking up on gold to diversify its vast foreign reserves. Usually, gold prices rise when dollar weakens and that is probably the trend which China, like the rest of the world, foresees in the future. Russia is another country which has been increasing its holdings of bullion.

Metals too will be the first to rise once the bounce back happens. Currently, the rally in iron ores is driven by China and its controversy with Rio Tinto. The three largest suppliers of iron ore in the world - Vael, SA, Rio Tinto and BHP Billiton are currently holding out to their cash sales to China to ensure supplies to customers in Europe, Japan and South Korea. Commodity experts say that demand and prices for Indian ore may increase should the Chinese state investigation discourage purchase of ore from Australia and Brazil. As per data put out by Bloomberg, China’s iron ore imports rose 3.4% in June to the second highest level this year. The shipments had hit a record of 57 million tons in April.

There are some murmurs in the corridors of corporate honchos that negative data from US came in at a time when it was essential to pull down the stock markets, timing it with the auction of the US Treasury Bonds last Wednesday. The usual trend is that people turn towards bonds when equities slip and in that auction, there was record demand for the bonds even as world over Govt's are having a tough time with bonds. The auction was three times oversubscribed, and this was the first time it had happened since 1994. But some time soon, US will realise that it is borrowing too much and that is the time which is feared by the currency traders.

Overall, the perception is that global stock markets would remain volatile, the dollar long term outlook does not look too good but outlook for commodities is bullish.

International Monetary Fund Report

IMF has put out a report which suggests that this recession might well be at its bottom and there is recovery ahead.

IMF has stated today that India’s economy would grow by 6.5% in 2010, compared with the April forecast of 5.6%. It has stated that sectors with strong domestic demand – auto and FMCG are expected to see very good growth.

In an update of its World Economic Outlook, the IMF said the global economy is likely to contract 1.4% this year, marginally lower than the 1.3% decline it projected in April. It now sees world growth strengthening to 2.5% in 2010, compared to an April forecast of 1.9%. The report has said that the global economy is slowly starting to pull out of its deepest recession since World War Two but a recovery will be sluggish and policies would need to remain supportive.

IMF states that while the world economy is still in recession, the recovery is coming but it is likely to be a weak recovery and emphasized that confidence in the financial sector would not return until toxic debts were removed from banks' balance sheets and frail institutions recapitalized. The IMF report warns an economic recovery still depends on government intervention. It says governments need to continue pushing stimulus measures, including increased spending or greater tax cuts, through 2010.

The revised IMF forecast says the U.S. economy will shrink 2.6% in 2009 and grow by 0.75% next year, rather than the 0% it forecast earlier this year. China's economy is now forecast to grow 7.5 percent this year. The IMF lowered its expectations for growth in Africa, the Middle East and Latin America, as they have been more hurt than the rest of the world. It expects Europe to show a much slower than expected growth in 2009 but in 2010 would grow faster than expected.

The Asian economies are expected to do much better but IMF has also warned that the growth in these countries could slow if the economic recovery fails to take hold in advanced economies.

This is not like a glowing report on the world economy from IMF but then at least for a change, there is something positive. At least there is the promise of recovery and that is good enough for now.

Advice On Sail & Adhunik Metaliks

Advice On Steel Authority Of India Ltd.

At the current market price (CMP) of Rs 153.65, the stock is trading at a forward P/E of 10.9x and 10.5x the FY10 and FY11 earnings, respectively. Based on our DCF valuation, we have arrived at a target price of Rs 181 (assuming a 15.4% WACC and a 5% terminal growth rate). At the CMP, the stock provides an upside potentional of 18%. Thus, we give a Buy rating to the stock. As the DCF valuation is sensitive to the changes in WACC and terminal growth rate, we have performed a sensitivity analysis of the same.


Advice On Adhunik Metaliks

AML's increased capacity (steel and ferro alloy) will be fully reflected from FY10 onwards. OMML has also started mining from the Q3 FY09. So, there will be a significant contribution (due to high margins) by OMML towards the consolidated net profit of AML, the full effect would be seen in the FY10E. At the current price of Rs 79.55, the stock is trading at a P/E of 6.1x FY10E & 4.2x FY11E, which we feel is quite undervalued looking at the huge earnings potential of the company & the quantum of mineral resources owned by the company. The current price of Rs.79.55 per share discounts our Target price of Rs.98.90 per share by 24.3%. We Recommend a “HOLD” Rating on the Stock with a Revised price target of Rs.98.90 per share.

My View On INEOS ABS

About The Stock

Known earlier as ABS Plastics, 83.33% stake is held by Ineos ABS Jersey and it today the holding company of Lanxness AG of Germany. The company has a manufacturing plant in Nandesari, Moxi which manufactures acrylonitrile butadiene styrene (ABS) with an annual production of 60,000 TPA was to be increased to 80,000 TPA in FY09 and further to 100,000 TPA in the current fiscal, which was to be funded through internal accruals. There is no news about this expansion in FY09 having gone through, especially given the tough times the company had to go through. The company`s products are used as raw materials in many households, automotive, electronic and telecom sectors, with a clientele list to include names like Samsung, LG, Videocon, BPL, Ford, Hero Honda, Cello, Lexi and Bajaj.

About The Results

For the first quarter ended 31^st March 2009, the company managed to turnaround and that itself was reassuring. From a net loss of Rs.4.35 crore in sequential quarter, it managed to post a net profit of Rs.5.93 crore and this was up 36% on a YoY. And this was despite a 15% fall in net sales on a YoY and a 19% on a QoQ. And this turnaround was thus possible only because the reduction in operating expenses, which on a QoQ was down 30% and 18% on a YoY.Interestingly, it is a zero debt company as it has no interest outgo.

Its strong point is its R&D facility at Moxi, Gujarat. Rated as one of the best in the business, this centre is currently engaged in research and development in areas of engineering thermoplastics for Lanxess’s global operations. The company plans to further upgrade its R&D facilities and its main focus will be on high-grade ABS which is a metal substitute at lower costs.

About The Stock

Its best to take a call on the stock once its results for Q2 is out, till then the outlook on the stock remains cautious.

Disclosure: I do not have any personal holding in this stock.

Indian Economic Survey

Presented by the Finance Minister, the economic survey is basically what the Govt wants to do over the next few years, not just in the forthcoming Budget but in the ensuing months. Usually, the survey is dull and drab and is mumbo jumbo of figures of revenues and expenses of the fiscal, but this Economic Survey is path breaking in the sense that it is more like a wish list of what to expect in the Budget.

THE ROAD MAP AHEAD:

ABOUT ECONOMICS…

1. GDP maintained at.7% in FY10

2 Ample liquidity to fuel next inflationary cycle

3 Roll back excess liquidity once growth picks up – clear signal of rates going up

4 Passage of Pension Regulatory bill

5 Zero Fiscal deficit on cyclical adjusted basis

FDI

1. 100% FDI in healthcare, weather insurance

2. Insurance FDI to be raised to 49%

3. FDI in defence production to 49%

4. Permit FDI in multi-format retail starting with food

PATH BREAKING MOVES….

1. Decontrol sugar and fertiliser

2. End Govt monopoly in railways, coal and nuclear energy

3. Lift price controls on all drugs, except essentials

4. Lift all bans on future contracts to restore price discovery

DISINVESTMENT…

1. Disinvestment - 5-10% in profitable non-navratnas

2. Auction loss making PSU

3. Aim – Rs.25,000 crore per annum from disinvestment

4. List unlisted PSUs , offload at least 10% equity

5. In loss making PSUs where net worth is zero, allow negative bidding in the form of debt-write off

TAXATION….

1. Introduce new income tax code

2. Rationalise dividend distribution tax to do away with double taxation

3. Review customs duty exemptions

4. Phase out cesses, surcharges and transaction taxes - commodities transaction tax, securities transaction tax and Fringe Benefit Tax

SUBSIDY…

. 1. Provide fertiliser subsidy directly to farmer

2. Limit LPG subsidy to 6-8 cylinder per consumer per year

3. Cut oil, fertiliser, food subsidy leakages

4. Convert producer subsidies into direct consumer subsidies

5. Kerosene subsidy to non-electrified/ non-LPG homes

Too many things in the economic survey appear more like wishful thinking than something which can be implemented. It would require a gargantuan amount of legislations and implementation mechanisms. The intent is good but does not seem feasible, especially when it comes to subsidies. How will the Govt ensure that fertiliser subsidy go to the farmer directly? How will the Govt know which home has no electricity or LPG to give them kerosene subsidy.